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Barney Barnato and the De Beers

Two men were behind the establishment of the De Beers, Cecil Rhodes and Barney Barnato. Barnato was born to a Jewish family in the East End of London in 1851 or 1852 as Barnett Isaacs. The future diamond magnet was born to a poor family and had a very unpromising beginning. His mother Leah died a year after he was born, and his older sister raised him and his two other siblings. His father, Isaac, was a shopkeeper who sold secondhand clothes. The family's poor financial situation forced the child to leave school early and help support the family by working at his father's shop as well as other odd jobs. Another way to support his family was to perform as an entertainer.

Barnato joined his brother Harry and together they had a vaudeville act, performing on the streets of London as comic magicians and street musicians under the stage name the Barnato Brothers. According to one account, Harry soon decided to leave London and travelled to Africa to seek his fortune. At 18, Barnett followed his brother and in 1873 joined his brother in Kimberley South Africa.

Those were the days of the South African diamond rush, two years after diamonds were discovered in Kimberley and just seven years after Erasmus Jacobs, the 15-year old son of a local farmer, discovered what would later be known as the Eureka Diamond on the banks of the Orange River. The Kimberley became the world's richest mine, running for nearly a century.

According to another account, they left for South Africa together with three other performers, sailing from Southampton with a variety company. The brothers planned to run a vaudeville show, and for a time they played with some success in what was known at the time as "The Smalls," remote towns in South Africa. When the Barnato brothers reached Kimberley, they found that everybody was prospecting for diamonds, which prompted them to drop their entertainment act to follow the same dream of quick riches through diamonds. Although the endeavor did not prove lucrative for most of those touched by local diamond fever, it proved to be a life-changing event for Barney Barnato.

He started by buying diamonds, often one at a time, and then selling them for a small profit, using the proceeds to buy more diamonds. However, dealing in rough diamonds, especially one at a time, was not very profitable and the two sought to dig for diamonds on their own. Digging for diamonds required a permit to dig at a claim – a license to search for diamonds at a very specific location. At the time, the Kimberley diamond resource was sectioned into a tight and busy array of some 3,600 small claims, and the two started looking for a claim of their own. Eventually, they were offered not one, but four adjacent claims. Although they were able to save only a small amount of money, they somehow scrapped enough to pay for the claims and started digging, setting up the Kimberley Central Diamond Mining Company.

Barnato was a smart and shrewd man. Although digging for diamonds may have been a better way to earn more than trading rough diamonds, he quickly realized that there were ways to earn even more. One issue on his mind was the price of rough diamonds. The diamond boom, coupled with a growing number of diamonds found and sold in the market, led to a downturn in price. Barnato is credited with developing the idea that limiting the outflow of rough diamonds would sustain prices. By controlling the supply of diamonds through tight management of inventory, prices can be forced up or down based on supply that accurately meets demand – no more, no less. He also understood that the growing supply was met not only with a decline in competition among buyers, but also with growing competition among sellers.

Trying to unite claim holders to sell at a given rate and at steady prices was next to impossible. The great fragmentation among claim holders also meant that the economies of scale could not be applied. This was the era of large monopolies. Railroads, oil, banking, and steel were controlled by a small number of players who could drive great profits not only by setting prices, but also by increasing efficiencies that can only take place in large operations. In addition, the fragmented diamond mining claims at Kimberley resulted in a number of disastrous outcomes. Because claims were being mined at different rates and reached different depths than those immediately surrounding them, land collapse and cave-ins became frequent, leading the loss of lives, equipment and mining time.

That led Barnato to a second conclusion – the need for consolidation. He was not the only one that had that idea. While the Barnato brothers were developing their business at Kimberley, Cecil Rhodes, working the De Beers mine, had the same idea. Rhodes arrived in South Africa from Hertfordshire, England at age 17. He came to Kimberley to become an ice merchant, serving the flood of miners and prospectors working in the hot African sun. Like the Barnato brothers, he also gravitated from supplying services to diamond miners to diamond mining itself. He became well known for implementing new, more mechanical mining practices, which allowed him to achieve better mining results and profits than his competitors. Rhodes could often be found mining his claims himself along with his workers, and learned to sort and value diamonds.

As the Barnatos started to buy claims in their drive for consolidation, using a combination of their own money, as well as financing from Rothschild & Sons, Rhodes began purchasing small mining claims and active mining operations as well. The brothers and Rhodes became major competitors in their race to consolidate. The initial 3,600 claims being mined at Kimberley shrank to about one hundred consolidated claims, with the Barnato brothers and Rhodes being two of them. Many of the other claims belonged to small claim holders who were unwilling to sell and the rest to several other companies that shared the desire to gain control of claims in a drive for a greater share of the local diamond mining pie, among them a French mining company, Compagnie Française des Mines de Diamants du Cap de Bonne Espérance. Despite the large number of remaining claim holders, the brothers and Rhodes became direct competitors.

In an effort to undermine each other, both groups ramped up diamond production and output, causing a flood of diamonds to enter the market without anyone to purchase them, and diamonds prices crashed. Both competitors hoped that the decline in prices would lead to the financial ruin of the other, to the point that they would not be able to afford to buy more claims and be forced to abandon their decision to take control of the mine. Hopes aside, neither succeeded in their goal of hurting the other to the point of abandonment. Rhodes succeeded consolidating all of the claims at the De Beers mine, but he failed to wrestle the claims out of Barnato's hands.

In a last ditch effort to gain control of a majority of the claims at Kimberley, Rhodes offered to buy the French diamond mining company, offering its owner £1.4 million. Barnato heard of the offer and made a counter offer of £1.75 million. At this point, Rhodes presented Barney with an interesting deal: withdraw the higher bid so Rhodes could buy the French company at his original bid price and, in return, Rhodes would sell it to Barnato for £300,000 plus a 20% holding in Barnato's publicly traded Kimberley Central Diamond Mining Company.

Barnato recognized that partnering was the logical outcome if consolidating all the mining activities was to succeed. What he did not know was that Rhodes had already purchased a large chunk of shares in Barnato's company. Together with the additional 20% holding, Rhodes was close to gaining a control of the company. Eventually, the two merged their companies to form De Beers Consolidated Mining Company on March 12, 1888. The company was named after the De Beer brothers, who owned a farm in the area where diamonds had been discovered in 1871, just a couple of months before the Kimberley resource was discovered.

With the main claims under their control, they took control of two other mines in the region, Bultfontein and Du Toitspan. Now they controlled an estimated 90% of the world supply of diamonds, and could move forward with their plan of setting diamond prices by managing diamond supply to the market. As part of that effort, the company decided to restrict rough diamond sales to a small number of companies to ensure continued control and steady prices. A group of ten diamond-buying companies based in London were selected, later to become known as the diamond syndicate. In return for being selected to receive a large part of the global supply of rough diamonds, they had to agree to the prices set by De Beers as well as to buy the entire supply provided to them. With that, De Beers ensured not only tight control over price, but also that they would always be able to sell their entire production. It may sound like a poor deal for the ten buying companies, but it was not. They, in turn, had control over a large part of the supply of polished diamonds, ensuring a handsome profit.

After his goal of gaining control of diamonds was achieved, Barnato, by now a very wealthy man, turned his attention to gold. He started buying gold mines as well as anything that supported gold mining, such as equipment. Because gold mining was already established by the time he entered the field, he instead purchased shares of gold mining companies on stock exchanges and doubled his fortune within a short number of years. However, he lost a major portion of that fortune when share prices collapsed.

On June 14, 1897, while en route to England, Barnato died at sea at the age of 46. The circumstances of his death are not clear, possibly an accident or suicide. According to one account, he may have been murdered. Although most consider Rhodes to be the person who established De Beers, credit must also been given to Barnato, who helped shape the modern diamond industry. He consolidated diamond mining in Southern Africa into a single company and helped build the sales system that would remain mostly unchanged for more than a century after his death.

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